4 Ways to Invest in Forex

foreign exchange rates

Forex or foreign currency and exchange trades massive volumes of currencies around the world. In 2013, the market cap already reached over $5 trillion a day, based on the Bank for International Settlements report.

For the wise, this volume and high level of activity provide plenty of opportunities to earn a profit and win big. Even better, you can choose your path according to these options:

1. Standard Account

The standard account is the original or the classic forex account offered by brokers. It is also the most popular and the most common account type because:

  • It has a low minimum amount for account opening, which makes it attractive to both beginners and veterans
  • It now has a low commission percentage unlike many years ago
  • Execution is now fast

2. True ECN

A market maker is an individual or a brokerage that acts as a middleperson between forex traders and providers, such as central banks and financial institutions. It earns money from the difference between the bid-ask price spread.

The asking price is the selling price of the security, while the bid price is the purchase amount. The difference between the highest ask price and the lowest bid price a trader will make is the spread.

Market makers help maintain the liquidity of the market and simplify the trading process, especially for beginners. The downside is since they manage both currencies, some people believe their decisions can work against the investor. Traders are also at the mercy of the currencies these market makers handle and the prices they provide.

To further decentralize the forex market, more investors are using true ECN brokers like Fair Forex. ECN stands for electronic communication network, and it’s a system that bypasses market makers. Instead, traders now have access to more providers and other market participants.

True ECN’s appeal comes from variety and flexibility. Investors can enter their orders, and the ECN scours through the database to find the best match for execution. However, the process is lightning fast, which reduces the risk of currency fluctuations affecting the trade.

3. Futures

investment market

Futures is a derivative or a contract between two parties who agree to specific trading conditions. It has these elements:

  • It is based on an underlying asset, such as bonds, stocks, and currency.
  • It comes with an expiration date, in which both parties have to execute the contract. A futures contract can have four expiration dates a year.
  • It also provides an agreed-upon price that one will buy and the other will sell.

Futures is highly speculative, but it also provides many advantages. First, it protects the investment against possible significant fluctuations of the currency. Second, it allows traders to deal with higher volumes of currencies.

4. Hedging

A hedge is an investor’s protection against market volatility. The value of the currency in the market can change so fast in minutes because of the different factors that can affect it such as:

  • Market performance
  • Country’s economy
  • Liquidity
  • Politics
  • Natural and man-made disasters

A trader can hedge in various ways. The simplest strategy is to take opposing positions for the same currency base pair (i.e., long and short position). Forex futures can also be a hedging strategy since it could minimize the risks, especially if investors believe the currency pair can experience massive value shifts later.